5 Reasons to Tap Into Your Home Equity
Owning a home is typically one of the biggest investments that someone might make in their life. Although it may seem like an overwhelming goal, the many benefits of homeownership make it worth the process. After learning a bit more about the mortgage and home buying process, the reality of homeownership won’t seem as scary anymore.
One of the biggest benefits of homeownership is the ability to tap into your home equity, meaning you can use your home equity to pay for other things.
What is home equity?
Simply put, home equity is the portion of ownership built up in your home. Each month you pay off more and more of the loan balance on your home. For example, when you purchase a home with a home loan and put 10% down, then you would have 10% equity in that home when you start out. As the years go by you’ll start paying more towards principal instead of interest and therefore building up more equity in your home.
So to calculate your home equity, it’s important to understand that equity stems from calculating the difference between your current property value and your loan balance left on your house. Lets say you have appraised your home and it came back at $350,000, and your lender shows you that you still owe $230,000 on your house. This means you’d subtract $230,000 from $350,000 to get your amount of equity, which in this case equals to $120,000.
What can you do with your home's equity?
Many first-time homebuyers don’t realize you can use your home equity to pay for other things. Have you heard people refer to your house as an “asset”? That’s referring to the idea that a mortgage loan is an investment by building home equity. Believe it or not, you can use that investment to pay for other expenses, usually big expenses.
But as you may have guessed, home values can differ at any given time. The value could decrease or increase based on the current market or home values in your neighborhood. If you take out too much, and your home’s value decreases, it could lead to some financial challenges. So it isn’t a great idea to use up all your home equity at once. But making smart financial choices with your home equity could lead to some awesome wins.
1. Renovate your house
If you’ve lived in your house a while and you’ve gained some equity, you could use that to pay for the much needed home improvements. You could also use it to renovate your home, particularly to increase it’s value. Kitchens and bathrooms are the primary renovation project because these improvements help achieve a higher home value if done well. Something to keep in mind though, not all renovations increase home values, especially those requiring to tear down walls. If you reduce your home from 4-bedrooms to a 3-bedrooms, that would likely decrease your home’s value. So just make sure if you use your home equity, you don’t accidentally reduce your home’s value in the process.
2. Buy a second home
You can use your home equity to buy your next house. If you’re moving or you’re purchasing an investment property or vacation home, your home equity could be used for a down payment, or even covers the cost of the house entirely with a cash offer.
There will likely be additional expenses with purchasing an investment property or a vacation home. For example, if an income property, you are the landlord. If something happens where maintenance is needed, it’s your responsibility to cover those costs. If you’re buying a vacation home you’ll need to make sure it’s maintained while you’re away. Also, if you don’t live there a certain amount of time out of the year, then your insurance, interest rates, etc. could be higher.
3. Pay for college
Whether it’s for yourself or your kids, your home equity could help you assist in paying for college. This could help prevent school loans from piling up, cover the cost of books and supplies, or even room and board for your child.
4. Purchase a car
If you have enough equity, you could essentially purchase a car outright. Or you can use some of that home equity as a down payment on a car, if that’s the best or most affordable route. Maybe a car you always dreamed of having but couldn’t afford it prior without putting a larger down payment on it.
Like with any big purchase, it’s a good idea to talk to a financial expert or accountant to make sure it’s the best investment and financial move for you and your family.
5. Pay for a wedding
Although it’s not quite an “investment”, your home equity could also go toward paying for your wedding or your child’s wedding. A grand gesture to say the least, but not always resulting in a good pay off — particularly if the marriage doesn’t last. Nonetheless, an option for some that’ll be sincerely appreciated!
A house, a car, a wedding? Not many know that your home equity is your investment in a house and you can use it to pay for other expenses. Before you get started, make sure to thoroughly think through your financial decision, get with a financial expert, and reach out to your mortgage banker to see how much you still owe on your house.
Home equity is the portion of your home that you actually own, calculated as the difference between your home's current market value and the remaining balance on your mortgage. Equity grows over time as you pay down your loan balance and as your home's value changes.
Subtract your remaining mortgage balance from your home's current appraised or market value. For example, if your home is worth $350,000 and you owe $230,000, you have $120,000 in equity.
The most common ways to access home equity are a home equity loan, a home equity line of credit (HELOC), or a cash-out refinance. A home equity loan and HELOC add a separate loan on top of your existing mortgage, while a cash-out refinance replaces your current mortgage with a new, larger one and gives you the difference in cash. A Mortgage Banker can help you decide which option fits your situation.
Using equity for renovations can make sense, especially for projects like kitchen or bathroom updates that tend to support home value. It's worth being cautious with renovations that reduce functional space, such as converting a bedroom into something else, since that type of change can sometimes lower a home's value instead of increasing it.
Yes. Home equity can be used toward a down payment on a second home, an investment property, or a vacation home, and in some cases may cover more of the purchase. Keep in mind that a second property comes with its own ongoing costs, such as maintenance, insurance, and potentially higher rates if it isn't your primary residence.
Yes, some homeowners use their equity to help cover tuition, books, or room and board for themselves or their children, which can help avoid taking on additional student loan debt. It's worth comparing the cost of borrowing against your home to other financing options before deciding.
It's possible, but these are generally considered lower-priority uses of home equity compared to investments like renovations or a second property, since a car depreciates and a wedding doesn't build any future value. If you're considering this route, it's worth speaking with a financial expert to weigh whether it's the right move for your situation.
Borrowing against your home equity reduces the ownership stake you've built, and if your home's value declines after you've borrowed heavily, it could create financial challenges, including owing more than the home is worth. It's generally not advisable to use all of your available equity at once, and a Mortgage Banker or financial expert can help you weigh how much makes sense to borrow.